Category: Economics 10e: Ch 26

As well as old theorists being brought out to help frame the financial crisis in a new context, old theories and policies seem to be getting a new airing as well. In the articles below various commentators consider whether joining the euro may offer a solution to our economic situation.

How the euro is gaining currency Guardian (6/10/08)
Contagion could fracture the eurozone Guardian (6/10/08)
Dithering Britain needs its own plan and it may hinge on joining the euro Guardian (1/10/08)

Questions

1. Explain how interest rates are set in the eurozone. To what extent might this act as a constraint on policy making in times of economic downturn?
2. Discuss the arguments for and against the UK joining the euro.
3. Assess reasons why joining the euro may be more appropriate for the UK now than a decade ago.

The European Central Bank has its tenth anniversary this year and the year is shaping up to be one of the toughest of the last decade in terms of economic management. While the Eurozone has generally withstood the global credit crisis very well, there are some possible problems emerging and the ECB will have to manage interest rates carefully to cater for the conflicting demands from economies at different stages of the business cycle.

If the Eurozone is on fire, will the ECB get burnt? Observer (1/6/08)
More testing times ahead as the euro turns ten Times Online (26/5/08)
Euro growth better than expected BBC News Online (15/5/08)

Questions

1. Explain the role of the European Central Bank (ECB).
2. Assess the difficulties faced by the ECB in setting interest rates for the whole Eurozone.
3. Discuss the extent to which the economic performance of stronger countries in the Eurozone will be constrained by weaker-performing economies.

Given the interdependence of the global economy, the economic slowdown in the West is likely to have worldwide knock-on effects. How serious will these effects be for the emerging economies of South East Asia? The following articles consider this question.

The decoupling debate The Economist (6/3/08)
Can Asia escape the effects of the downturn in the West? Times Online (17/3/08)
Just enough power to save themselves Times Online (25/3/08)

Questions

1. Explain the term emerging economy.
2. Discuss the extent to which the economic performance of the emerging economies will help reduce the likelihood of recession in the UK.
3. Discuss the extent to which the economic performance of the emerging economies is likely to be affected by recession in the USA.

The euro has climbed during March to a record high against both the dollar and the pound. The reluctance of the ECB to cut interest rates has simply served to strengthen this trend and it looks set to continue for a while.

Euro hits record highs Times Online (6/3/08)
Euro hits new highs as ECB rejects early cut in rates Times Online (7/3/08)
Sterling hits new low against euro Guardian (5/3/08)
Dollar slides to fresh euro low BBC News Online (14/3/08)

Questions

1. Explain the principal factors that have led to the appreciation of the euro against the dollar.
2. Discuss the likely impact of this appreciation on firms in (a) the eurozone and (b) America.
3. Examine whether the appreciation of the euro strengthens or weakens the case for those in the UK wanting to join the euro.

China’s rate of inflation has hit an 11-year high, partly due to the cold winter weather destroying crops and pushing up food prices. However, inflationary pressure has been growing for some time with rapid economic growth and the resultant pressure on resources. This is despite six increases in interest rates in the past thirteen months.

Families feel pinch as inflation threatens economic miracle Guardian (25/2/08)
Chinese inflation soars to an 11-year high Times Online (20/2/08)
Chinese inflation hits 11 year high Times Online (19/2/08)

Questions

1. Explain the principal factors that have led to the increase in inflation in China.
2. “Policymakers in China will likely try to tighten monetary policy further, with more reserve requirement ratio hikes, faster Chinese yuan appreciation, and more heavy handed controls over bank lending.” Discuss the likely effectiveness of these policy measures.
3. Assess the extent to which changes in food prices will affect the overall level of aggregate demand in the Chinese economy.